Commercial Buy-to-Let Mortgage

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Rather than operating your own business from the property, you become the landlord and receive rent from the commercial tenant.

The property might be a shop, office, warehouse, industrial unit, restaurant or another type of business premises.

Commercial buy-to-let mortgages are also commonly described as commercial investment mortgages. The lender will assess the property, the proposed tenant, the lease, the expected rental income and your experience as a commercial landlord.

Commercial mortgage criteria can vary significantly between lenders. MortgageKey can review your proposed investment and help identify lenders whose requirements may be suitable.

What is a commercial buy-to-let mortgage?

A commercial buy-to-let mortgage is finance secured against a commercial property which is, or will be, rented to an unrelated business tenant.

The rental income received from the tenant is normally expected to support the mortgage payments and the wider costs of owning the property.

A commercial buy-to-let mortgage could be used to finance:

Shops and retail units
Offices
Warehouses
Industrial units
Factories and workshops
Restaurants and cafés
Pubs and licensed premises
Medical or dental premises
Nurseries
Hotels and guest houses
Storage facilities
Mixed-use properties
Other eligible commercial premises

Commercial properties and tenants carry different levels of risk. The type of business operating from the premises can therefore affect the lenders available, the required deposit and the interest rate.

How does a commercial buy-to-let mortgage work?

The mortgage is secured against the commercial property. You or your company owns the building, while a separate business occupies it under a commercial lease and pays rent.

The lender will normally consider whether the rent is sufficient to cover the mortgage payments. It may also assess your personal or company income, assets, liabilities and experience.

Commercial mortgages are often individually priced rather than offered through a single standard range available to every applicant.

The terms available may depend on:

The property type
The purchase price or valuation
The amount you want to borrow
The deposit
The expected rental income
The tenant’s financial strength
The length and terms of the lease
Your experience as a landlord
Your credit history
Whether the property is already occupied
The proposed ownership structure

If the application is approved, the lender registers a legal charge against the commercial property. You must maintain the agreed payments throughout the mortgage term.

What is the difference between commercial buy-to-let and residential buy-to-let?

A residential buy-to-let mortgage is used to finance a house or flat rented to residential tenants.

A commercial buy-to-let mortgage is used for business premises rented to a commercial tenant.

The main differences can include:

The type of property
The type of tenant
The form and length of the lease
How the property is valued
How rental income is assessed
The size of the deposit
The mortgage term
The lender’s underwriting process
The legal and valuation costs
The applicable tax treatment

Residential buy-to-let properties are often valued by comparing them with similar local homes. Commercial properties may be valued partly by reference to the rent, lease and investment yield.

A commercial lease can also be longer and more complex than a standard residential tenancy agreement.

What is the difference between a commercial investment mortgage and an owner-occupied commercial mortgage?

A commercial investment mortgage is used when you own a property that is occupied by another business.

An owner-occupied commercial mortgage is used when your own business trades from the property.

For example:

Buying a shop and renting it to a retailer would normally require a commercial investment mortgage.
Buying a shop from which you operate your own retail business would normally require an owner-occupied commercial mortgage.
Buying a building where your company occupies one part and another business rents the remainder may require a more tailored arrangement.

The distinction is important because lenders assess owner-occupied and investment applications differently.

For a commercial investment mortgage, the tenant, lease and rental income will be central to the decision. For an owner-occupied mortgage, the lender will focus more heavily on the trading business and its ability to make the payments.

What is a semi-commercial or mixed-use mortgage?

A semi-commercial property contains both commercial and residential accommodation.

Examples can include:

A shop with a flat above it
An office with residential accommodation
A pub with an owner’s flat
A restaurant with flats on the upper floors
A retail unit with several residential units above
A commercial building partly converted for residential use

A standard residential or buy-to-let mortgage may not be suitable for a mixed-use property. A semi-commercial mortgage may therefore be required.

The lender will consider:

The proportion of commercial and residential space
Whether the areas have separate access
The commercial use
The residential tenancy arrangements
The leases
The overall rental income
The property’s planning use
Whether any part will be occupied by the borrower

The regulatory, tax and valuation treatment of a mixed-use property can be different from a wholly commercial building. Specialist legal and tax advice may be required.

How much can I borrow on a commercial buy-to-let property?

The amount available will depend on the property’s value, rental income and the lender’s maximum loan-to-value.

The lender may consider:

The purchase price
The property’s market value
The investment value
The annual rent
The remaining lease term
The tenant’s financial standing
The condition of the property
The property type and location
Your deposit
Your financial position
Your experience
The proposed mortgage term

The lender will normally require the rent to provide an adequate margin above the mortgage payments.

Commercial mortgage calculations are not identical across the market. One lender may place greater weight on the existing rent, while another may consider market rent, your personal income or the financial resources of the borrowing company.

What deposit is needed for a commercial buy-to-let mortgage?

Commercial investment mortgages normally require a meaningful deposit or amount of equity.

The precise requirement will depend on:

The property type
The tenant
The lease
The loan amount
Your experience
Your credit profile
The ownership structure
The lender’s risk assessment

A standard shop or office occupied by an established tenant under a strong lease may attract different terms from a specialist property that would be difficult to re-let.

The deposit could potentially come from:

Personal savings
Company funds
Sale proceeds
Equity released from another property
A director’s loan
An acceptable gift
Another source approved by the lender

You will need to provide evidence of the source of the deposit. The lender and solicitor will also carry out anti-money laundering and source-of-funds checks.

How do lenders assess commercial rental income?

The lender will normally compare the rental income with the expected mortgage payments.

It may consider:

The current passing rent
The open-market rental value
Rent review provisions
The remaining lease term
Break clauses
Rent-free periods
Tenant incentives
Whether rent is being paid on time
Who is responsible for repairs and insurance
The financial strength of the tenant
Whether the lease is inside or outside the Landlord and Tenant Act 1954

A property with a strong tenant and a long lease may be viewed as a more stable investment. A short lease, an imminent break clause or a tenant with weak finances may restrict the available options.

The lender may require the rent to cover a specified percentage of the stressed mortgage interest. It may also assess whether you could maintain the payments during a period when the property is vacant.

Why is the commercial tenant important?

The value and performance of a commercial investment can be closely connected to the tenant occupying it.

A lender may review:

The tenant’s identity
The nature of its business
How long it has traded
Its accounts and financial position
Its payment history
The remaining lease term
Whether there are personal or company guarantees
The likelihood of the tenant renewing the lease
Whether the property could be re-let if the tenant leaves

A nationally recognised business with a strong financial position may be viewed differently from a newly established company without filed accounts.

This does not mean that a property occupied by a smaller business cannot be financed. However, the lender may require more information or apply a lower loan-to-value.

Why is the commercial lease important?

The commercial lease sets out the relationship between the property owner and tenant.

It can cover:

The annual rent
Rent-payment dates
The length of the tenancy
Rent reviews
Break clauses
Repairing obligations
Insurance obligations
Service charges
Permitted use
Assignment and subletting
Renewal rights
Responsibilities at the end of the lease

The lender’s solicitor will normally review the lease as part of the application.

A long lease does not automatically make an application stronger. The quality of the tenant, rent level, break clauses and lease obligations will also be considered.

You should obtain advice from a commercial property solicitor before granting, varying or accepting a lease.

Can I get a commercial mortgage on a vacant property?

It may be possible to finance a vacant commercial property, but the available options are likely to be more limited.

Without a tenant, there is no existing rental income to support the mortgage. The lender may therefore consider:

Your personal or company income
Cash reserves
The expected market rent
Demand for the property
The time likely to be required to find a tenant
Your experience as a landlord
The proposed use
The property’s condition
The required loan-to-value

Some lenders may provide a commercial investment mortgage based on a credible plan for letting the property. Others may require bridging or short-term finance until a suitable tenant is in place.

Short-term finance can be more expensive and must have a clear and realistic repayment strategy.

Can I get a commercial mortgage with a short lease?

A lender may consider a property with a short occupational lease, but the remaining term can affect its appetite and valuation.

A lease approaching expiry creates uncertainty because:

The tenant may leave
The rent may change
The property could become vacant
Costs may be incurred before re-letting
The investment value may reduce
A new tenant may require incentives or alterations

The lender will want to understand whether the tenant intends to renew and how easily the property could be re-let.

Where the property itself is leasehold, the remaining term of the superior lease is also important. The lender will normally require the property lease to extend sufficiently beyond the proposed mortgage term.

Can I get an interest-only commercial buy-to-let mortgage?

Commercial buy-to-let mortgages may be available on a repayment or interest-only basis, subject to the lender’s criteria.

With a repayment mortgage, each payment covers the interest and part of the original amount borrowed. Provided all payments are made, the balance should reduce over the mortgage term.

With an interest-only mortgage, the monthly payments generally cover only the interest. The original amount borrowed remains outstanding and must be repaid using an acceptable repayment strategy.

The lender may expect the loan to be repaid by:

Selling the commercial property
Refinancing with another lender
Using business or personal assets
Repaying it from another acceptable source

Interest-only borrowing can produce lower monthly payments, but it does not reduce the original mortgage balance.

Can an individual obtain a commercial buy-to-let mortgage?

A commercial investment property could potentially be purchased by:

An individual
Joint applicants
A partnership
A limited liability partnership
A limited company
A special purpose vehicle
Another acceptable business structure

The lenders and terms available can depend on the chosen structure.

A lender may require personal guarantees from directors, shareholders, members or partners. A personal guarantee can make the guarantor personally responsible if the borrowing entity does not meet its obligations.

The ownership structure can also affect tax, legal liability, succession and how profits are withdrawn.

MortgageKey can advise on mortgage availability, but you should obtain independent tax and legal advice before choosing how to purchase the property.

Can a limited company get a commercial buy-to-let mortgage?

Yes, a limited company may be able to obtain a commercial investment mortgage.

The lender will normally assess:

The company’s activities
Its trading history
Company accounts
Bank statements
Existing borrowing
Directors and shareholders
The directors’ experience
The property
The tenant and lease
Rental income
The source of the deposit

Some lenders consider newly established companies, particularly where the directors have relevant property or business experience.

Directors and significant shareholders may be required to provide personal guarantees. Independent legal advice may be required before the guarantees are completed.

Can I remortgage a commercial buy-to-let property?

It may be possible to remortgage an existing commercial investment property.

Reasons for remortgaging can include:

Replacing an expiring mortgage product
Obtaining a new interest rate
Raising additional capital
Funding property improvements
Purchasing another investment
Repaying short-term finance
Restructuring existing borrowing
Moving to another lender

The new lender will assess the current property value, rent, tenant, lease and outstanding mortgage.

If you are raising capital, the lender will also consider how the additional money will be used and whether the rent supports the increased borrowing.

Early repayment charges may apply to the existing mortgage. These should be considered alongside the new lender’s arrangement, valuation, legal and intermediary fees.

Can I use a commercial mortgage to buy a property at auction?

It may be possible to finance an auction purchase, but auction deadlines can make a standard commercial mortgage difficult to complete in time.

When a bid is accepted, the buyer normally becomes legally committed and must complete within the period stated in the auction contract.

You should review the auction legal pack and arrange finance before bidding.

If a standard commercial mortgage cannot complete within the required period, bridging finance may be considered. The bridging loan could potentially be repaid by refinancing onto a longer-term commercial buy-to-let mortgage after completion.

This strategy carries risk. The long-term mortgage is not guaranteed, and short-term finance can involve higher interest rates and fees.

What properties can be difficult to finance?

Commercial mortgage lenders have different appetites. Properties that may require specialist consideration include:

Pubs and nightclubs
Petrol stations
Care homes
Hotels
Places of worship
Properties with environmental concerns
Buildings of non-standard construction
Properties requiring substantial refurbishment
Very small commercial units
Properties in weak locations
Premises with restrictive planning uses
Properties with short leases
Buildings occupied by connected businesses
Commercial units with residential accommodation

A property declined by one lender may still be considered by another with different criteria.

The property must represent acceptable security and have a realistic alternative use or resale market if the lender ever needs to recover its money.

Does my experience as a landlord matter?

Experience can be important, particularly for specialist or higher-risk properties.

The lender may consider:

How long you have owned investment property
The number and type of properties
Experience with commercial tenants
Experience managing leases
Whether you use a managing agent
Your knowledge of the relevant business sector
Previous property development experience
The performance of your existing investments

Some lenders accept first-time commercial landlords if the wider application is strong. Others may require previous residential or commercial property experience.

A first-time landlord buying a specialist property occupied by a complex business may have fewer options than an experienced commercial investor.

Can I get a commercial mortgage with bad credit?

Previous credit problems do not necessarily prevent you from obtaining a commercial buy-to-let mortgage.

Some lenders may consider applicants who have experienced:

Missed payments
Defaults
County court judgments
Mortgage arrears
Previous business difficulties
A limited credit history
Historic insolvency events

The lender will consider the type, amount, timing and cause of the credit issue. It will also assess whether the problem has been resolved and whether current commitments are being maintained.

Where a company applies, the lender may review both the company’s credit history and the personal credit records of its directors and shareholders.

Adverse credit may reduce the available options, increase the interest rate or result in a lower maximum loan-to-value.

How is a commercial property valued?

A commercial valuation is generally more detailed than a standard residential mortgage valuation.

The valuer may consider:

The property’s location
Its size and condition
The current use
Alternative uses
Planning restrictions
Comparable sales
Market rent
The current rent
The tenant
The lease terms
Investment yield
Local demand
Environmental risks
Reinstatement costs

The valuation may provide several figures, including vacant-possession value, market value and investment value.

The lender may base its maximum loan on the lower of the purchase price or an appropriate valuation figure.

You will normally be responsible for the valuation fee, even if the application does not proceed.

What costs should I consider?

In addition to the deposit and mortgage payments, a commercial property investment can involve:

Mortgage arrangement fees
Valuation fees
Legal costs
Broker fees
Stamp Duty Land Tax
Survey costs
Insurance
Repairs and maintenance
Service charges
Management costs
Business rates during vacant periods
Accountancy and tax costs
Environmental assessments
Lease-renewal costs
Rent-free periods
Tenant incentives
Refurbishment costs

Responsibility for repairs, insurance and other costs may be divided between the landlord and tenant under the lease.

You should obtain a detailed legal explanation of your obligations before completing the purchase.

What tax applies to a commercial property purchase?

The tax treatment depends on the property, transaction and ownership structure.

Commercial and mixed-use properties are generally subject to non-residential Stamp Duty Land Tax rules in England and Northern Ireland. Different land transaction taxes apply in Scotland and Wales.

The amount payable can depend on:

The purchase price
Whether the property is freehold or leasehold
Any lease premium
The net present value of rent
Whether the property is wholly commercial or mixed-use
Whether any relief applies

Rental profits and future gains may also be subject to Income Tax, Corporation Tax or other taxes depending on who owns the property.

Tax rules can change and the correct treatment depends on the transaction. Obtain advice from a qualified accountant or property tax adviser before proceeding.

Is a commercial buy-to-let mortgage regulated?

A mortgage secured entirely against commercial property will not normally be regulated in the same way as a residential mortgage.

However, the position can be different where the security includes residential accommodation or where part of the property will be occupied by the borrower or a close family member.

A mortgage may require additional regulatory consideration if a significant proportion of the secured land is used, or intended to be used, as a dwelling.

Mixed-use properties should therefore be reviewed carefully. The correct regulatory classification will depend on the property, occupancy and purpose of the borrowing.

What are the risks of a commercial property investment?

Commercial property investment can provide rental income, but it also carries substantial risks.

These include:

The tenant failing to pay rent
The tenant becoming insolvent
Long periods without a tenant
Falling commercial property values
Reduced demand for the property
Expensive repairs
Environmental liabilities
Interest rates increasing
Difficulty refinancing
Break clauses being exercised
Lease-renewal costs
Business rates during vacant periods
Planning restrictions
Difficulty selling the property

Commercial properties can take longer to re-let or sell than residential properties.

You should maintain appropriate cash reserves and consider whether you could continue making mortgage payments during an extended vacant period.

How MortgageKey can help

Commercial mortgage applications require a detailed understanding of the property, tenant, lease and applicant.

MortgageKey can review:

The property you want to purchase or remortgage
The purchase price and estimated value
The commercial use
The tenant and its financial position
The existing or proposed lease
Rental income
The deposit and its source
Your personal or company finances
Your property experience
Your credit history
Your preferred mortgage term
The proposed repayment method

We can then search for lenders whose commercial investment criteria may fit the application and explain the likely rates, fees, deposit requirements and information needed.

All commercial mortgages are subject to status, valuation, eligibility and the lender’s criteria.

Speak to a commercial mortgage adviser

If you are purchasing or remortgaging a shop, office, warehouse, industrial unit or another commercial investment property, MortgageKey can help you explore the available finance.

Our advisers can assess the property, rental income, tenant, lease and your financial circumstances before approaching potentially suitable lenders.

Making an initial enquiry does not guarantee acceptance and does not require you to proceed with a mortgage.

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